Risk assessment

Activity sustained by consumption and exports

Despite a low-quality institutional and political environment, economic activity is expected to continue to grow moderately in 2018. Household consumption should be further improved by rising income, which will benefit from the vitality of immigrant workers’ remittances (9% of GDP) and the tourism boom. Retail trade will benefit from this favourable trend, unless the problem of Agrokor’s local distribution subsidiaries (Konzum and Mercator) is not resolved. Primary sector and industry exports, particularly mineral extraction, forestry, basic metallurgy, chemicals, shoes, and machinery, will grow thanks to the favourable economic situation of the main trading partners. The recent update of the commercial component of the Stabilisation and Association Agreement with the EU will contribute to this development. However, given that imports will increase with consumption at the same time, the contribution of trade to growth would be small. Public investment will depend on the IMF’s release of additional funding as part of its expanded credit facility and, indirectly, funding from the EU. Their payment is conditional on the adoption of a number of reforms, particularly with regard to indirect taxation and bank deposit guarantees. This money would boost construction through the continuation of the construction of the “Corridor Vc” motorway, which is expected to cross the country between the Croatian border to the north and the Adriatic Sea. Both domestic and foreign private investment will remain modest because of the persistence of institutional weaknesses and a mediocre business climate not offset by the low cost of labour.

Suitable public accounts, but a high current account deficit

A slight loosening of fiscal policy, coupled with the non-renewal of Russia’s repayment of Soviet debt in July 2017 for EUR 125 million, is expected to lead to the re-emergence of a slight public deficit in 2018. However, a small deficit and moderate growth will stabilise the proportion of public debt, the foreign share of which represents 29% of GDP, which was obtained under favourable conditions from public multilateral agencies and is denominated mainly in euros and the local currency, the mark, pegged to the euro. It is divided almost equally between the country’s Bosnian-Croat and Serbian constituent entities, but, given the respective GDPs, the Serbian public debt is more burdensome (60% of GDP). While the public accounts situation appears to be adequate, their management fragmented between the central State and the two constituent entities, the blocking of multilateral payments forcing the acquisition of debt locally at a high rate, while the servicing of the debt already accounts for 5% of GDP, and the future cost of the pension and healthcare systems suggest a difficult future.

The current account deficit should remain high in 2018. The trade deficit should still represent about a quarter of GDP. Immigrant workers’ remittances and the surplus of services related to tourism and transport will partially offset the trade deficit, as usual. FDI (3% of GDP), some financing from the EBRD, and the short-term indebtedness of the private sector will make it possible to balance payments, while keeping foreign exchange reserves at a comfortable level, equivalent to six months of imports. Despite the debt reduction of banks, foreign debt represents 76% of GDP, and its private share alone accounts for 46%.

A political environment marked by ethnic divisions and three coexisting governments

Following the 1995 Dayton Accords, Bosnia Herzegovina was divided into two distinct autonomous entities: the Federation of Bosnia-Herzegovina, predominately Bosniak (Muslim) and Croat, and the Serb Republic of Bosnia, to which the Brčko district managed by the central State is added. The central State is headed by a collegial Presidency that is representative of the three “constitutive peoples” with a presidency alternating every eight months. The Constitution grants only very limited powers to the central State: responsibility for foreign and monetary policy, customs duties, VAT, transport and defence. Even these competences are difficult to manage, because each ethnic component has a blocking minority within the Central Parliament. In addition, at both the central and entity levels, there is a great deal of government instability due to the fact that the nationalist parties fluctuate within government coalitions. At the central level, there is no longer a majority, preventing the adoption of texts influencing the resumption of multilateral financing and the candidature for the EU. It is likely that the general elections of October 2018, both at the central level and at the level of the two entities, will not improve the situation, with voters continuing to vote exclusively in favour of nationalist parties. The political instabilities will remain, with the Bosniak Muslim politicians attempting to increase the role of the central government, whilst Croat politicians, striving to establish their own autonomous entity, as well as the Serb politicians work to block the legislative process. Institutional complexity makes it difficult to correct inadequacies of justice, regulatory disparities, corruption, oppressiveness, and poor administrative efficiency.